European shares fell to a three-month low in brisk volume on Monday and braced for a bumpy ride as worsening global economic conditions and political uncertainty in France and the Netherlands threatened to deepen the euro zone's crisis. The pan-European FTSEurofirst 300 index fell 24.32 points, or 2.3 percent, to 1,021.76, a level not seen since mid-January, having traded 123.2 percent of its 90-day volume average.
The plunge came as data showed the euro zone's private sector unexpectedly slumped in April, denting the demand outlook for European corporates and potentially hampering governments' efforts to balance their budgets. "Euro zone economic momentum is weakening and it is going to be more difficult for governments to reach fiscal targets in a weak growth environment," Emmanuel Cau, a strategist at J.P. Morgan said.
"Valuations are becoming cheap again and earnings expectations are quite low already but there is no clear catalyst, which has to be either growth reacceleration or policy response. But markets may need to be weaker before you get a clear policy answer." Also fuelling fiscal concerns was a government crisis in the Netherlands, a close ally of Germany in the austerity push, and the results of first-round presidential elections in France, where Socialist candidate Francois Hollande, who promised to renegotiate a European budget compact, beat incumbent Nicolas Sarkozy.
In this context, Cau recommended steering clear of European financials - among the worst performers on Monday - which were set to suffer the most from deteriorating macroeconomic conditions and heightened sovereign debt concerns. Euro zone banks, which own the bulk of the region's debt, fell 3.7 percent on Monday, hitting levels last seen in late November, before the European Central Bank's first offering of ultra-cheap thre-year loans.
They weighed on the euro zone blue chip STOXX 50E index, which fell 2.9 percent to 2,244.83 points, sending a bearish technical signal as it breached below the lower barrier of a falling wedge, according to Philippe Delabarre, an analyst at Trading Central. Delabarre added the selling pressure on the index was also maintained by its declining 20- and 50-day simple moving averages, with the Euro STOXX 50 now heading for support levels at 2,210 or 2,180.
Signalling mounting investor wariness, the put/call ratio on the Euro STOXX 50, a ratio of the trading volume of put versus call options used to gauge investor sentiment, rose to a four-week high of 1.781, according to Thomson Reuters Datastream. While an increase in traded put options signals that a rising number of investors are positioning themselves to benefit from further losses in stock prices, the ratio was getting close to 2, an extreme level seen as a contrarian indicator to start buying battered stocks.
Better-than-expected first quarter results sent Dutch group Philips Electronics to the top of the FTSEurofirst 300 board, with the stock up 3.3 percent in volume three and a half times the average. But in a further sign of Europe's dire economic conditions, the region's largest consumer electronics maker warned that the weak economic environment, with fragile consumer spending and government budget cuts, would affect its businesses in the rest of the year.
Chip maker STMicroelectronics was at the other end of the table, falling 13.8 percent in volume three time the average after its loss-making joint venture with Ericsson, ST-Ericsson, announced it would cut 1,700 jobs to offset declining business from feature-phone makers. Swiss food group Nestle fell 2.8 percent after agreeing to buy US drugmaker Pfizer's infant nutrition business for $11.85 billion, a price regarded as high by some analysts.
"Although the growth profile, attractive margins and emerging market exposure makes this a compelling asset, we believe that the multiples being some way ahead of market expectations may dampen near term enthusiasm for the deal," Citi analyst Robert Dickinson said. Rival Danone, which was beaten by Nestle to the deal, rose 1.3 percent as investors were relieved to learn the French group was not g e tting involved in an expensive acquisition.
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